Fast pace of private equity investments means more insurance placements for portfolio companies

Speed can equal success when a private equity firm is looking to acquire a company. But the rush to close a deal can also mean insurance gets put on the back burner.

A private equity firm often buys a controlling stake of a company and then becomes an active owner in that portfolio company. But deals need to be done “very, very quickly,” which can leave private equity firms scrambling to put together an entirely new insurance program at the last minute, said Sandy Norton, assistant vice president of financial institutions and professional services, Liberty Mutual Canada.

“If a private equity firm buys a brokerage, the new owner of that brokerage needs to ensure they have a comprehensive insurance program in place for their newly acquired business before they close the transaction,” said Norton. “Otherwise, they may be left open to E&O risk.”

Adding to the urgency is the fact that private equity firms have unique risks which are not contemplated by standard directors and officers (D&O) or errors and omissions (E&O) policies, he said.

For example, directors of the private equity firm often sit on the portfolio company’s board and are actively involved in selecting the management team. This means these directors and officers have personal liability when it comes to their board roles, Norton said. So, it’s crucial to look for broad-form coverage.

“It’s really important to look for a private equity policy that’s got broad coverage for outside directorship liability when an insured person is sitting on the board of directors … as well as a policy that uses a really broad definition of professional services,” he said.

A broad form with blanket outside directorship liability coverage can remain in place every time the private equity firm acquires a portfolio company.

“It’s got to be readily available,” Norton said, “so the directors and officers of that private equity fund at least can have coverage for themselves on a personal liability basis while sitting on the board of the portfolio company; every time they acquire a company irrespective of that portfolio company having coverage in place.”

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